1 Operations management

Chapter 1

Operations Management: Trends & Issues

Operations Management Definition

 An operations system is defined as one in which  several activities are performed  to transform a set of inputs into useful output  using a transformation process

 Operations Management is  a systematic approach to  address all the issues pertaining to  the transformation process that converts some inputs into output that are useful, and  could fetch revenue to the operations system Mahadevan (2010), “Operations Management: Theory & Practice”, 2nd Edition © Pearson Education

Operations Management (OM) Salient Aspects

 OM is a systematic approach  using scientific tools & techniques and solution methodologies to analyze problems

 OM is about addressing several issues  varying in terms of time horizon, nature of decisions

 Transformation processes are central to Operations  Focusing on keeping costs to the minimum  Developing a set of measures to assess performance of the system Mahadevan (2010), “Operations Management: Theory & Practice”, 2nd Edition © Pearson Education

Manufacturing Sector Salient Aspects

Index of Industrial Production* 2003‐04 2004‐05 2005‐06 2006‐07 Average Manufacturing 9.20 9.10 12.50 10.27 Capital goods 13.60 13.90 15.80 18.20 15.38 Consumer goods 7.20 11.70 12.00 10.10 10.25 Intermediate goods 6.40 6.10 2.50 12.00 6.75 # Corporate Sector Performance Sales/Income: Manufacturing 13.30 20.50 18.30 23.10 18.80 Sales/Income: Services (other than  financial)  27.00 21.40 15.70 22.60 21.68 ‐9.10 ‐66.10 ‐13.90 32.60 ‐14.13 Sales/Income: Financial services  Wages and Salaries: Manufacturing  6.70 3.00 8.90 18.20 9.20 Wages and Salaries: Services (other than  financial)  16.00 35.10 17.90 26.50 23.88 Wages and Salaries: Financial services  12.80 8.60 11.20 10.90 10.88 147.80 58.30 17.30 58.40 70.45 PAT: Manufacturing  PAT: Services (other than financial)  165.60 109.90 39.50 27.60 85.65 PAT: Financial services  62.30 ‐2.70 27.70 34.90 30.55 Total Assets: Manufacturing  7.00 12.50 18.80 20.70 14.75 Total Assets: Services (other than  11.10 13.30 18.10 21.60 16.03 financial)  Total Assets: Financial services  14.70 14.60 18.60 23.80 17.93 Gross Savings: Manufacturing  58.60 31.50 14.00 45.10 37.30 Gross Savings: Services (other than  financial)  34.30 40.20 11.90 31.60 29.50 30.80 8.50 17.30 24.30 20.23 Gross Savings: Financial services  Mahadevan (2010), “Operations Management: Theory & Practice”, 2nd Edition © Pearson Education

All number in the table represent growth % over the previous year * Compiled from Economic Survey 2007 – 08, Government of India, Ministry of Finance, Economic Division, Oxford University Press, New Delhi, 2008, pp 201 # Compiled from Economic Intelligence Services (EIS) database on Corporate Sector

Indian Manufacturing Export Potential of Sectors Current Exports

Potential Exports

Electrical & Electronics

$ 1.25 b

$ 15 - 18 b

Design & Engineering skills, vendor base

Lack of scale, Low domestic demand

Apparel Manufacturing

$ 6.10 b

$ 25 - 30 b

Vertical integration, skilled labour, design skills

Lack of scale, operational expertise

Auto-components

$ 1.10 b

$ 20 - 25 b

Engineering and continuous improvement of skills

Fragmented industry and poor OEM linkages

Specialty chemicals

$ 1.60 b

$ 12 - 15 b

Low cost manpower and process innovation skills

Application R & D and marketing

Sector of Industry

Strengths

Weaknesses

Source: Based on Roshni Jayakar, “Manufacturing’s Next Export Wave,” Business Today, 24 April 2005 , pp. 66–72. Mahadevan (2010), “Operations Management: Theory & Practice”, 2nd Edition © Pearson Education

Service – Manufacturing Continuum Pure Product

Pure Service Ayurvedic Healing Treatment Legal/Tax Consulting Cyber Café – Telephone Booths Emergency Maintenance Services Facilities Maintenance High quality restaurant meal Fast food in a eat out joint Customized durable goods Fast moving commodities Vending Machines

Adopted from Hill, T. (2005), Operations Management (Palgrave Macmillan), 2nd Edition, pp 14. Mahadevan (2010), “Operations Management: Theory & Practice”, 2nd Edition © Pearson Education

Service Sector in India GDP growth rate Service Sectors

2001 -02

2002 -03

200304

2004 -05

2005 -06

200607

Trade, Hotels, Transport, Communications

9.2

9.4

12.0

10.7

11.5

11.8

Financial Services, Insurance, Real Estate & business services

7.3

8.0

5.6

8.7

11.4

13.9

Public administration & defence and other services

4.1

3.9

5.4

6.9

7.2

6.9

All number in the table represent growth % over the previous year * Compiled from Economic Survey 2007 – 08, Government of India, Ministry of Finance, Economic Division, Oxford University Press, New Delhi, 2008, Table A-7.

Mahadevan (2010), “Operations Management: Theory & Practice”, 2nd Edition © Pearson Education

Service Operations Salient Features

 Tangibility: Services are performances and actions rather than objects, therefore having poor tangibility  Heterogeneity: High variability in the operation system performance  Simultaneous Production & Consumption: Degree of customer contact is very high  Perishability: Services cannot be inventoried as in the case of manufactured products. Mahadevan (2010), “Operations Management: Theory & Practice”, 2nd Edition © Pearson Education

Operations Management in Services Process flow diagram for passport application processing

Source: Ravichandran, N and D. Bahuguna (2006), “Rule Bound Government Agency to Customer Centric Service Facility: Can Indian Passport Offices make the leap?” IIMB Management Review, 18(1), 59 – 66. Mahadevan (2010), “Operations Management: Theory & Practice”, 2nd Edition © Pearson Education

Manufacturing & Service Similarities & Differences Manufacturing Organizations

Service Organizations Differences

Physical durable product

Intangible, perishable product

Output can be inventoried

Output can’t be inventoried

Low customer contact

High customer contact

Long response time

Short response time

Regional, national, Intl. markets

Local markets

Large facilities

Small facilities

Capital intensive

Labour intensive

Quality easily measured

Quality not easily measured Similarities

Is concerned about quality, productivity & timely response to its customers Must make choices about capacity, location, layout Has suppliers to deal with Has to plan its operations, schedules and resources Balance capacity with demand by a careful choice of resources Has to make an estimate of demand Mahadevan (2010), “Operations Management: Theory & Practice”, 2nd Edition © Pearson Education

Operations

A key functional area in an Organisation Finance

Operations

Marketing

HRM

Mahadevan (2010), “Operations Management: Theory & Practice”, 2nd Edition © Pearson Education

Operations Function

Linkages with other functions Customer Layer Ultimate Customer

Operations Support Layer Marketing

Dealers Retailers

Core Operations Layer

Layer of Innovation Innovation Strategy Research & Development

Testing Fabrication

Maintenance

Costing

Planning

Material

IT

Quality

Tooling

Design

IE

Assembly Machining Supplier Layer

Service Delivery system Sub-contractors

Suppliers

Other service providers Source: B Mahadevan, The New Manufacturing Architecture, Tata McGraw Hill, New Delhi, 1999.

Mahadevan (2010), “Operations Management: Theory & Practice”, 2nd Edition © Pearson Education

Operations Management A systems Perspective Forecasting

PROCESSING

Operations Planning & Control

Quality Management

Purchasing & Inventory Control Material & Capacity Planning

Maintenance Management

Process Improvement

Mahadevan (2010), “Operations Management: Theory & Practice”, 2nd Edition © Pearson Education

Goods

Services

Feedback

Capital

INPUT

Material

Process & Product Design

OUTPUT

Labour

Operations Management Functions

Design of Operations

Product Design & Development Process Design Quality Management Location and Layout of facilities Capacity Planning

Operational Control of Operations

Forecasting Production Planning and Control Supply Chain Management Maintenance Management Continuous improvement of operations

• Design issues in Operations Management lay down overall constraints under which the operations system functions • Operational Control issues focuses on optimizing the use of available resources in the short-term while delivering goods and services as per plan under the given design constraints

Mahadevan (2010), “Operations Management: Theory & Practice”, 2nd Edition © Pearson Education

Operations Management Challenges

 Competitive Pressures due to economic reforms  Tariff reduction has exposed Indian companies to global competition  Chelliah Committee tax reforms proposed during 1992 – 94 triggered this process

 Abolition licensing policies had enabled several new players to enter into business increasing domestic competition and capacity build up  Examples include liberalization of two wheelers and LCV segment in early 1980’s and passenger car segment in early 1990’s

 Indian customers are more demanding in terms of quality, cost and delivery of goods & services Mahadevan (2010), “Operations Management: Theory & Practice”, 2nd Edition © Pearson Education

Operations Management Challenges

 Growing customer expectations  Examples: Tariff plans and options provided by mobile operators, options in passenger car  Customers tend to demand more and refine their expectations  Manufacturing & Service organizations must learn to respond to these expectations  Need to develop capabilities to bring newer products and services faster and yet profitably Mahadevan (2010), “Operations Management: Theory & Practice”, 2nd Edition © Pearson Education

Operations Management Challenges

 Today’s businesses are constantly challenged by the rapid technological advancements 

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Example 1: ATMs & Internet Banking. Customers need not visit a bank branch. Drafts and cheques replaced with electronic payment gateways & fund transfer mechanisms. Example 2: Buying a train ticket. By visiting a Web site like http://www.irctc.co.in/, a customer can accomplish all tasks pertaining to ticket booking and cancellation at leisure. Example 3: Procurement of goods & services. A manufacturing organization can procure goods & services by organizing a reverse auction on the Internet. In 3 to 4 hours, the best price for a component and the supplier willing to provide the component at a desired quality can be located. Example 4: New Product Development. A team of design personnel from across different geographical locations can participate in new product development using technological tools.

Mahadevan (2010), “Operations Management: Theory & Practice”, 2nd Edition © Pearson Education

Operations Management Challenges

 Environmental Issues 

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When Government of India announced a scheme for special economic zones (SEZs), it generated controversies and social concerns. Growing industrialization raises concerns regarding the depletion of natural resources and the waste generated from production systems and end-of-life products. Growing urbanization creates societal problems arising out of scarcity of available resources and generation of solid wastes. Consumption of energy and water in countries like India is on the rise. Such a situation requires better practices and newer methods of addressing these requirements using better operational practices. Increasingly, firms are under pressure to take responsibility of restoring, sustaining, and expanding the planet’s ecosystem instead of merely exploiting it.

 OM practices must address environmental concerns in order to ensure a sustainable world Mahadevan (2010), “Operations Management: Theory & Practice”, 2nd Edition © Pearson Education

Operations Management Implications & Priorities

 Relate operations system to Customer/ Market  Acquire Capabilities to tolerate product proliferation  Develop systems and procedures that promote learning  Develop Green Manufacturing Practices

Mahadevan (2010), “Operations Management: Theory & Practice”, 2nd Edition © Pearson Education

Operations Management: Trends & Issues Chapter Highlights  Operations Management is a systematic approach to address all issues pertaining to the transformation process that converts some inputs into useful output  Globally, India is emerging as an important manufacturing base.  Several recent studies point to emerging opportunities for Indian manufacturing to grow and attain a global presence.  From an operations management perspective, the notion of a ‘pure product’ and ‘pure service’ is just the two ends of the spectrum.  In reality, a vast majority of operations share a continuum of products and services.

Mahadevan (2010), “Operations Management: Theory & Practice”, 2nd Edition © Pearson Education

Operations Management: Trends & Issues Chapter Highlights…  Despite several important differences between products & services, from an OM perspective there are several similarities between the two  Decision context in operations management can be broadly classified as  Design and operations control issues  Long term and short term decisions

 Some of the challenges faced by operation firms include  Need to address increased competition due to economic reforms  Addressing the growing expectations of the customers  Rapid technological advances  Emerging environmental concerns

Mahadevan (2010), “Operations Management: Theory & Practice”, 2nd Edition © Pearson Education